Democrats Shifting Focus Back to Jobs Creation

By JACKIE CALMES

Published: May 18, 2010

WASHINGTON -- Perhaps the only thing slower than the economy in creating new jobs is the process by which the White House and Congress are creating new jobs bills.

A year that Democrats decreed would be about ''jobs, jobs, jobs'' has produced a far different check list as its sixth month nears: health care, financial regulation, energy, a nuclear arms treaty and a Supreme Court vacancy, as well as investigations into a mine accident, a calamitous oil spill, a failed terrorist attack in Times Square and alleged Wall Street fraud.

That crowded calendar of priorities largely explains why the employment bills have languished, Democrats say. They hope to change that starting this week.

The House, which in December narrowly passed a $154 billion stimulus package that hit a wall in the Senate, plans to debate a substitute of at least that size that Democratic Congressional leaders have negotiated; it would extend myriad popular business tax breaks and aid for the unemployed and hard-hit states.

And on Tuesday, President Obama will head out of town -- to a steel-pipe plant near Youngstown, Ohio -- to highlight the local benefits of the original $787 billion, two-year recovery act and to show that he is indeed thinking about jobs.

But the legislative lassitude to date is due to more than the Democrats' distractions. With Republicans nearly united in opposition, a bigger factor is the Democrats' divisions both in Congress and within the White House over what and how much to do for an economy that has begun creating jobs, if too slowly for the politicians in an election year, and over where to find the revenues to offset the costs of more tax cuts and spending.

Those disputes in turn are rooted in the contradictory demands of these unusual economic times, when the nation is sluggishly emerging from a recession just as it is entering a long-predicted period of rising debt due to an aging population and inadequate revenues.

Many economists agree that the economy needs a final infusion from the government to encourage skittish employers to hire, banks to lend to small businesses, and states and cities to keep their teachers and others on the public payroll.

Yet even before the European Union and the International Monetary Fund bailed out Greece to prevent another financial contagion, the mounting debt of the United States was prompting calls at home for major reductions in the budget deficit, including from the administration and some Democrats in Congress.

With the economy showing signs of growth, juggling the competing demands for short-term deficits and long-term deficit reduction has gotten much harder for Mr. Obama and his allies in Congress.

''It's very important for policymakers to provide significant support to the economy -- by which I mean deficit spending -- until employment is definitively moving along,'' perhaps late this year, said Mark Zandi, chief economist for Moody'sEconomy.com. He recommended at least $80 billion more for aid to states and the unemployed, which would bring total stimulus spending and tax cuts to more than $1 trillion.

''But,'' he added, ''I think it is time to be more disciplined. I think it's time to pay for it.''

That is just what many moderate and conservative Democrats have demanded as the price of their support, in keeping with a new pay-as-you-go law mandating offsetting savings for new spending or tax cuts.

But that breaks with the economic theory that it is counterproductive for the government to raise taxes or cut spending when it is trying to stimulate job creation. And after weeks of backroom debates, Congressional Democrats say they tentatively have agreed that ''pay-fors'' will not be required to offset some safety net programs -- an extension through this year of emergency unemployment compensation, subsidies for those who pay to keep the health insurance they had on the job, and perhaps Medicaid assistance for states.

Even so, the remaining costs for business tax breaks, especially for struggling small businesses, outstrip the sources of revenues that Democrats can easily agree to.

Yet so great is the election-year appetite to help small business, and to show toughness toward Wall Street, that Senate Democrats may drop their opposition to House Democrats' repeated calls for higher taxes on managers of hedge funds and private equity firms.

The proposal, which has White House support, would raise up to $25 billion over 10 years by requiring that partners pay ordinary income tax rates -- up to 39.6 percent, assuming the Bush tax cuts expire this year -- on their ''carried interest'' in the profits of a partnership. Investment managers now pay the lower capital gains rate, a maximum of 15 percent.

That would pay most of the cost for this year of extending the business tax cuts, including a perennial credit for corporations' research and development expenses. Then, however, lawmakers must figure out how to pay for two or three additional measures on Democrats' agenda. First is a package for small businesses, including an exemption from capital gains taxes for investors in qualified ventures. Next up, if there is time and offsetting savings, is a ''green jobs'' bill with tax incentives for manufacturers of energy-saving products.

A priority for some Democrats, however, is a proposal from Senator Tom Harkin of Iowa and Representative George Miller of California for $25 billion to avert layoffs of teachers; a small amount would go to retain firefighters and police officers. Estimates suggest up to 300,000 teachers could lose jobs for the coming school year, starting weeks before election day.

Some Democrats complain that Mr. Obama has been ineffective in speaking out, while administration officials say the legislative dawdling confuses voters. And a campaign of the Democratic National Committee to label Democrats as the ''Results Party'' has been widely criticized, since unemployment remains near 10 percent.

''It says you're out of touch,'' said Stanley Greenberg, a party pollster. Based on voter surveys, he and John Podesta, the former Clinton administration chief of staff, are urging a populist message that Democrats are fighting for the middle class against corporations.